SVB regulators face Congress

SVB regulators face Congress

Author: The Carta Policy Team
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Read time:  7 minutes
Published date:  March 31, 2023
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Updated date:  September 5, 2023
Binance charged as crypto reckoning continues

The Topline

  • Regulators questioned on supervision, deposit insurance, & VC-SVB relationship

  • DC dynamics complicate bipartisanship

  • CFTC targets Binance while Congress plots path for crypto regulatory framework 

  • FinCEN issues guidance around Corporate Transparency Act

  • CFPB finalizes small business lending rule 

SVB reckoning begins in Congress

Top officials from the Treasury Department, the Federal Reserve, and the FDIC faced the wrath of Congress this week in hearings on the collapse of SVB. In both chambers, lawmakers from both sides pressed the regulators on the lead-up to the failure, what went wrong, who’s to blame, and where to go from here. In addition to criticizing SVB management, here are a few highlights:

  • Regulatory oversight: Some Democrats asserted that regulatory tailoring efforts in 2018 weakened oversight, ultimately enabling SVB’s problems. However, Republicans pointed out that regulators retained substantial discretion and supervisory authorities but failed to use the tools available. We are not likely to see any legislative efforts to increase bank regulation advance, but expect to see efforts to strengthen capital and liquidity requirements from the regulators. The Biden administration released a statement calling for regulators to toughen oversight of the banking industry.  

  • Role of deposit insurance: Members debated the appropriate scope of FDIC deposit insurance, and the FDIC’s plans for a special assessment on the banking industry to support the Deposit Insurance Fund. There was strong bipartisan sentiment that community banks should not foot the bill for the mistakes of SVB and the “coastal elites.” Determining how to balance the notion of insured deposits with moral hazard in this new area of the digital bank run will likely be the biggest challenge. 

  • Role of venture capital: Members also probed the SVB business model that catered to the industry and the financial perks—lines of credit, private jet financing—that were offered in exchange for exclusive business. To get these incentives, some policymakers asserted VC pushed their portfolio companies into the bank; these very same VCs encouraged the massive outflow at the sign of distress. While not explicitly referenced, the concentration of power in VC is a talk track to watch. Expect the scrutiny on the venture model to continue as the House continues with its capital formation agenda and when SEC Chair Gary Gensler appears before the committee on April 18.

What’s next: Over the coming weeks and months, Congress will continue to investigate and debate policy solutions to prevent future runs. The Fed and FDIC are expected to issue reports by May 1 around the collapse of SVB and recommended policy responses. The reports will also shed light on unilateral actions the agencies may take versus what would require congressional involvement—the latter being more difficult in a divided Congress with slim margins.

Curious how shifts in policy will affect venture capital? Join the Carta policy team on Wednesday, April 5 at 10 am (PT)/1 pm (ET), as they discuss  the SEC agenda and congressional dynamics, and how they will shape the private markets.  Register here.

DC dynamics: the art of the, er, possible

Former President Trump has been indicted. SVB has collapsed. Crypto policy remains thorny. Election season is ramping up (yes, even this early). And the debt limit is approaching with both sides posturing rather than mapping a resolution. 

Why it matters:Well, first, the debt ceiling matters. The House speaker and president exchanged superficial letters, but are making no forward progress. Democrats are messaging that recent banking turmoil will pale in comparison to a default. We have time, but as we get closer this will take all the oxygen—and depending how it unfolds, it could poison the well for bipartisanship. 

This leads to the second point: These factors could complicate legislating, which requires bipartisan support in this divided Congress. We are cautiously optimistic—and doing the work—to push a capital markets package. We have a limited, but viable path forward on expanding accredited investor onramps and increasing investment and size parameters for venture capital funds. We will need to insulate it from macro political issues to make it work. 

CFTC targets Binance, and Congress plots path forward on crypto regulation

The CFTC filed charges against Binance, the world’s largest crypto exchange, its CEO Changpeng Zhao, and former chief compliance officer for illegally operating a derivatives exchange in the U.S., among other wrongdoings. CFTC Chair Rostin Behnam claimed Binance intentionally circumvented CFTC regulations, including encouraging U.S. clients to inappropriately use virtual private networks (VPNs) to shield their locations. The CFTC is seeking expansive trading and registration bans, along with a permanent injunction against further regulatory violations, in addition to monetary penalties and disgorgement. The SEC (which is also reportedly investigating Bianace) brought charges this week against crypto trading platform Beaxy for operating an unregistered exchange, broker, and clearing agency—a case that could be a model for a future case against Coinbase. 

Prospects for a crypto legislation:Meanwhile, HFSC Chairman McHenry indicated a path forward for a crypto regulatory framework addressing market structure and stablecoins. On market structure, McHenry has indicated he has agreement with leadership of the House Agriculture Committee, which oversees commodities markets, on principles that capital could be raised through the securities framework and transition to the CFTC if the asset becomes a commodity. Alignment between HFSC and Ag helps remove a barrier for congressional action, but any crypto legislation will face an uphill battle in the Senate. 

Why it matters: While Congress debates the path forward, which will not happen in the near-term, regulators will fill the vacuum with enforcement actions. The Binance suit is the latest blow to the crypto industry as it reels from the loss of several key banks in recent failures and an onslaught from the regulators, with more actions likely to come. The CFTC charges scrutinize Binance’s arrangements with U.S. trading firms, which could cause market makers to step back, resulting in reduced crypto market liquidity. While the market regulators have been the most aggressive in going after the industry, banking regulators have also raised concerns that threaten crypto access to financial services. A failure to access these necessary services could doom the industry.

FinCEN issues KYC guidance

The Financial Crimes Enforcement Network (FinCEN) published the initial tranche of guidance for complying with beneficial ownership information (BOI) reporting requirements created by the Corporate Transparency Act (CTA). 

Why it matters: The BOI regulations take effect on Jan. 1, 2024. CTA compliance will pull in a large swath of entities in the innovation ecosystem, requiring them to compile and report this information. Carta is exploring how to support the implementation process and ease the reporting demands on growth-stage companies and their investors.

CFPB finalizes small business lending rule 

The Consumer Financial Protection Bureau finalized Section 1071 of the Dodd-Frank Act, which outlines how financial institutions and nonbank lenders collect and report small business lending data. The rule seeks to improve visibility into capital flows and increase access to capital for groups that are commonly excluded, namely women and minorities; however there are concerns the rule will be overly burdensome for small lenders, which could drive them out of small business lending and make it harder for small businesses to access credit.  Implementation will be phased in, with compliance beginning Oct. 1, 2024 for lenders that originate 2,500 small business loans annually, to Jan. 1, 2026 for lenders that originate at least 100 annually.

Why it matters: The final Section 1071 rule is far-reaching, applying to small financial institutions, as well as non-bank lenders, including fintechs. The new 1071 requirements will create significant new compliance obligations and operational changes, and may also increase liability around potential fair lending violations, both from regulators and the plaintiffs’ bar.

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Author: The Carta Policy Team
Carta’s Policy Team aims to connect the policymaking community and venture ecosystem to build an ownership economy and advance policies that support private companies, their employees, and their investors.